Results

• 9M16 revenue of RM15.8bn was translated into a core net profit of RM1.3bn, accounting for 86% and 68% of HLIB and street FY forecasts, respectively.

• In line considering weaker 4Q16 to be impacted by higher D&A and interest expenses.

Deviations

• Largely within expectation.

Dividend

• None.

Highlights

• QoQ: The marginal top line growth of 3% was mainly contributed by full quarter Ncell consolidation but was partly offset by the decline in Celcom. Core net profit expanded by 36% thanks to Ncell and improvement recorded in Robi.

• YoY: The 8% uplift on revenue was due to consolidation of Ncell. However, this was not reflected in core net profit which fell 2% weighed down by higher (1) D&A; (2) interest cost; and (3) lower contributions from M1 and Idea.

• YTD: Top line grew by 9% but bottom line declined by 19% for the same reason as above.

• Celcom: Despite the shrinking sub base to 11.1m, 3Q16 service revenue growth turns positive (+1.2% qoq) after three consecutive quarters of decline. YTD performance remains torpor impacted by the VAS issue and dismay showing in the prepaid / migrant segments. Postpaid showed recovery signs led by new data products but prepaid remains challenging. Data penetration reached 60% while YTD mobile internet revenue grew by 18.9%.

• XL: Postpaid performance was solid by adding 21k subs with ARPU strengthened ARPU to IDR116k. However, prepaid’s 1m net adds was negated by the softened ARPU of IDR35k, down IDR1k qoq. Started to roll-out U900 (UMTS/3G over 900MHz) to provide better 3G experience and in-building coverage especially outside of Java. These sites are readily upgradable to 4G.

Catalysts

• Higher smartphone penetration boosting data ARPU.

• Strong growth in low penetration developing markets.

• Penetration into new markets and in-country consolidations.

Risks

• Regulatory risks, price wars and high gearing level.

Forecasts

• Unchanged.

Rating

• HOLD ↔ , TP: RM5.28

• Regional exposure with focus on emerging countries with great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a long term catalyst.

Valuation

• SOP-derived TP is lowered to RM5.28 (see Figure #10) from RM5.64 after adjusting its stake in merged Robi and updated consensus TP for M1 and Idea.

• Reiterate HOLD despite more than 10% upside to TP as we prefer to remain cautious while closely monitoring turnaround indicators.

Source: Hong Leong Investment Bank Research - 25 Nov 2016